The Subsidy Policy

Austrian federal subsidies, both direct and indirect, stabilized as a
share of GDP during the late 1980s. Direct subsidies were estimated to
average about 0.4 percent of GDP, and indirect subsidies were estimated
at about 1.3 percent of GDP. The subsidies began changing during the
late 1980s from generally defensive subsidies intended to preserve
traditional industries to more specifically targeted programs such as
special subsidies for research and development, innovation, and
environmental protection. The Innovation and Technology Fund was
established, and in 1989 the government conducted a special review to
reduce subsidies to certain traditional industries and to tourism.

Agricultural subsidies were well below the EC average during the late
1970s, but they rose during most of the 1980s. By the end of the decade,
they had reached a level slightly above the EC average. In addition, the
government subsidized investment and debt service for nationalized
industries and covered occasional losses for those industries.

To reduce the burden of the nationalized companies on the state
budget, the government began a systematic effort to privatize its share
in those companies in the late 1980s. Some of the privatization efforts
included the sale of the mint to the partially privately owned
Nationalbank. The government's share in Austrian Airlines was reduced to
a small majority ownership, and 49 percent of the state electricity
company was sold. The federal government's share in the
Creditanstalt-Bankverein and the Österreichische Länderbank was
reduced to 51 percent. In other instances, however, privatization took
place through the sale of state assets to other government-owned or
government-directed organizations, rather than to the private sector.
For this reason, the program did not generate as much income as
originally anticipated.

The level of regulation and subsidization, combined with the
significant national ownership of major industries, makes production and
consumption costs high. On average, consumer prices in Austria are
between 10 and 20 percent higher than in EU member states. They are even
higher than in Germany, which is also noted for its high prices. Direct
comparisons indicate that productivity in Austria is lower than in
Germany but that markups for consumer retail sales and profit margins in
the distribution system are higher.

These figures raise a number of important questions for Austrian
economic planners as they prepare for the economic unification of Europe
after the collapse of the Soviet Union's satellite system. The
competitive pressures against Austrian producers and workers will likely
increase in a widened EU, especially if states having low costs, such as
those of Eastern Europe, are admitted.